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Morgan Stanley caught playing both sides of Allergan-Valeant fight

Morgan Stanley is among the i-banks tracked by analytics firm Coalition.Morgan Stanley is among the i-banks tracked by analytics firm Coalition.
Morgan Stanley is among the i-banks tracked by analytics firm Coalition.Photograph by Emmanuel Dunand/AFP/GettyImages

Well, this is awkward.

Last month, Morgan Stanley offered to help pharmaceutical giant Allergan fend off a takeover attempt by Valeant Pharmaceuticals. In private emails soliciting Allergen’s business, Morgan Stanley bankers criticized Valeant’s offer and called the company “a house of cards.”

Today, Allergen (AGN) included snippets of those emails in a press release to convince investors that the Valeant (VRX) offer was inadequate. Last week, Allergan rejected the latest takeover proposal from Valeant, a $53 billion stock-and-cash offer the former said “substantially undervalues” the company.

But the press release also drove home another point: Morgan Stanley (MS) tried to play both sides of the deal. It recently landed a role advising Valeant, Allergen’s nemisis. Last month, Valeant was a “house of cards.” Today, it’s a major client.

The Wall Street Journal notes that it is fairly common for bankers to pitch both sides of a potential transaction, though it is rare that a company like Allergan would make public the pitch e-mails it received from a bank it did not eventually hire. Spokeswomen from Morgan Stanley and Allergan declined to comment.

If anyone is keenly aware of the irony here it’s Allergan, which highlighted Morgan Stanley’s comments attacking Valeant as an unsuitable merger partner. It appeared to do so knowing full well about the relationship between Valeant and Morgan Stanley – all the better to embarrass them.  Allergan pointed out in its press release that “executives from Morgan Stanley, the investment bank understood to have recently been retained by Valeant, have sent emails directly to Allergan’s management team that suggest they share the concerns of Allergan . . .”

One note, sent to Allergan from Morgan Stanley’s global M&A head Robert Kindler last month, reads: “My takeaway is that AGN is not being nearly aggressive enough in going after the VRX business model and currency.” In a follow-up e-mail, Morgan Stanley health care banker David Horn explained further,”Part of what Rob [Kindler] is suggesting [to Allergan] is to allow him to use his significant relationships with media and analysts to provide a clear and detailed articulation of why Valeant is a house of cards and your investors should not want to take their stock.”

At the bottom of Monday’s Allergan release, which also cites several analysts and reporters, the company notes that it “neither sought nor obtained” permission to use the quotes from the sources cited. You can be pretty sure that Morgan Stanley wouldn’t have agreed, if it had been asked.

Roy Smith, a professor at NYU’s Stern School of Business, tells Fortune he is not surprised by Allergan’s release of the Morgan Stanley e-mails. Smith believes such tactics have the potential to garner Allergan a more attractive offer from Valeant, or even another buyer. “If it causes some doubt among the Allergan shareholders that might be receiving this, then that’s not so bad,” he says.

For added context, it is worth noting that Goldman Sachs (GS) is now advising Allergan on the takeover fight with Valeant after previously advising Valeant on a number of past transactions, including a $2.3 billion offering last year.

In any case, Valeant doesn’t seem too bent out of shape about Morgan Stanley’s statements to Allergan. Valeant CEO Michael Pearson said in a statement to WSJ that while his team might “have some fun” with Kindler over the e-mails, “he’s still very much on our team.”

Even so, Smith thinks Morgan Stanley has some reason to blush today. “I think it is embarrassing,” he says of the bank’s e-mail pitches seeing the light of day. Smith thinks the e-mails make Morgan Stanley look “opportunistic” about securing a spot on either side of a potentially large transaction after they weren’t one of the first banks hired to advise the companies at the start of the matter.